FHA Delays Controversial Credit Requirement Rule

The FHA has delayed a controversial credit law for its loans until at least July.

The Federal Housing Administration (FHA) has delayed a controversial credit rule that some saw as a major obstacle to homeownership.

The rule, which we originally covered last week, would require lenders to analyze the creditworthiness of its borrowers with much more intensity, and credit disputes with debts of more than $1,000 would have harmed the loan candidate’s chances at securing the loan, regardless of their credit score. 30 to 40 percent of first-time-homebuyer loans were expected to be impacted by the new rule, according to an analysis by JPMorgan Chase, and consequently, the profits of homebuilders (particularly KB Homes, which gets half its business from FHA-backed loans) would similarly suffer.

According to a HousingWire article on the rule, the FHA sent a notice late Friday announcing it would postpone the rule until July and, in the meantime, seek public comment from lenders, builders and other industry professionals on the rule’s potential impact.

Lisa Jackson, senior vice president of research and business development with John Burns Real Estate Consulting, said in the article that HUD did not anticipate the wide-ranging impact of the rule.

“There is clearly a bigger ripple effect here than the Department of Housing and Urban Development might have anticipated going into this revision,” Jackson said. “Any measure that impacts even 10 percent of sales is meaningful, and our analysis shows it would be far greater in some markets.”

Though the FHA had attempted to tone down some of the more incendiary elements of the original law via documentation requirements (if lenders provided the necessary documents, the FHA would consider ignoring the credit disputes and approving the loan), it was still substantially more work than lenders were originally required to perform. Previously, the lenders were free to judge the severity of the credit dispute for borrowers.

Also, borrowers would have had to either pay the loan in full, institute a series of payments (and prove such a plan exists) or provide documentation on why the dispute is faulty to meet FHA approval.

The policy, despite its aggressive opposition from the real estate industry, was hardly surprising, given the recent string of restricting measures the FHA has adopted to shore up its fragile finances, which have included new rules for condo associations and, most notably, increases for premium fees. Ironically, all of those changes have come at a time when the Obama White House, which oversees the agency, has been making the FHA a more central figure in its housing policies.

Jackson, though, in HousingWire’s article, was optimistic about the rule, in light of the FHA’s delay. “There are two positives to this latest decision: HUD is willing to analyze the real implications of the housing market before they put a new measure in place, plus they are engaging feedback on the issue,” Jackson said.

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